It is comprehensive Presentation covering all the aspects of Takeover defenses like
Active Takeover Defense and Preventive Take over Defense
Hope you enjoy reading it as much as i enjoyed working it
2. Topics
• Definition
• Some Concepts
• Types
• Preventive Defense
• Types of Preventive Takeover Defense
• Active Defense
• Types of Active Defense
3. Hostile Take over
A takeover is considered "hostile" if the
target company's board rejects the offer, but
the bidder continues to pursue it, or the
bidder makes the offer without informing
the target company's board beforehand.
4. Terms used
• Killer bees are firms or individuals that are
employed by a target company to fend off a
takeover bid; these include investment bankers
(primary), accountants, attorneys, tax
specialists, etc.
They aid by utilizing various anti-takeover
strategies, thereby making the target company
economically unattractive and acquisition more
costly.
5. Types of Hostile Takeover
• Tender offer: acquiring company makes a
public offer at a fixed price above the current
market price
• Creeping Tender offer: purchasing enough
stock on the open market, known as a creeping
tender offer, to effect a change in management
• Proxy Fight: tries to persuade enough
shareholders, usually a simple majority, to
replace the management with a new one which
will approve the takeover
6. • The famous proxy fight was Hewlett-Packard's
takeover of Compaq. The deal was valued at $25
billion, but Hewlett-Packard reportedly spent huge
sums on advertising to sway shareholders.
• HP wasn't fighting Compaq -- they were fighting a
group of investors that included founding members
of the company who opposed the merge. About 51
per cent of shareholders voted in favour of the
merger. Despite attempts to halt the deal on legal
grounds, it went as planned.
Proxy Fight
7. Categories of Takeover defense
• Preventive measures
• Active measures
Preventive measures are designed to reduce the
likelihood of a financially successful hostile
takeover
Active measures are employed after a hostile bid
has been attempted
8. Precautionary Measures
• Having a Early Warning Systems
Monitoring Shareholding
Trading Patterns
• Poison Pills
• Flip-over
• Flip-in
• Back-End Plans
• Voting Plans
• Shadow pill
• Chewable pill
• Corporate Charter Amendments
• Staggered terms of the board of directors
• Supermajority provisions
• Fair price provisions
• Dual capitalization
• Golden Parachutes
9. Having Early Warning System
• Analyze distribution of share ownership
of the company
• Monitor the trading of its shares (trading
patterns)
11. Staggered Board Amendments
• It is a type of defense where the terms of the
board of directors so that only a few such as
one-third of the directors may be elected
during any one given year
• It requires share holder approval before they
can be implemented
• Classified directors cannot be removed before
their term expires
12. Supermajority Provisions
• These provisions usually require that at least 80%
of voting shareholders approve of the takeover, as
opposed to a simple 51% majority. Such a
requirement can make it nearly impossible for an
acquirer to obtain enough votes approving the
takeover.
13. Fair Price Provisions
• It is a modification of corporations'
charter that requires the acquirer to pay
minority shareholders at least a fair
market price for the company’s stock.
• -it is usually in terms of company’s P/E
ratio
• -it’s a weak takeover defense
14. Dual Capitalization
Restructuring of equity into two
classes of stock with different
voting rights
E.g..
Ford Motors
Berkshire Hathaway
Concept of Golden Shares
15. Poison Pills
• A strategy used by corporations to discourage hostile takeovers.
With a poison pill, the target company attempts to make its stock less
attractive to the acquirer.
• First invented by famous Takeover Lawyer Martin Lipton in 1982 to defend
El Paso Electric against General American Oil
• Actual Poison Pill was used in Brown Forman Vs. Lenox Takeover in 1983
• There are different types of poison pills
Flip-Over Shadow pill
Flip-In Chewable pill
Back-End Plans BankMail pill
Voting Plans
16. Flip-in
A "flip-in" allows existing shareholders (except the
acquirer) to buy more shares at a discount.
Management offers shares to investors at a discount if
an acquirer merely purchases a certain percentage of the
company. The discount is not available to the acquirer, and
so it becomes extremely expensive for that acquirer to
complete the takeover. Experts estimate that it would cost
an unwanted bidder, on average, four to five times more to
“swallow” a poison pill in order to acquire a target
17. Flip-over
A "flip-over" allows stockholders to buy the
acquirer's shares at a discounted price after the merger
A ‘’flip-over’’ allows stockholders to buy the
acquirer’s shares at a discounted price after the
merger. The holders of common stock of a company
receive one right for each share held, bearing a set
expiration date and no voting power. In the event of an
unwelcome bid, the rights begin trading separately from
the shares.
18. Cont.…
If the bid is successful, all shareholders
except the acquirer can exercise the right to
purchase shares of the merged entity at
discount. For instance, the shareholders have
the right to purchase stock of the acquirer on a
2-for-1 basis in any subsequent merger. The
significant dilution in the shareholdings of the
acquirer makes the takeover expensive and
sometimes frustrates it. If the takeover bid is
abandoned, the company might redeem the
rights.
19. Back-End Plans
It is also known as note purchase rights plans. The first
plan was developed in 1984 . Under back-end plan
share the holder receive a right dividend which give
share holder ability to exchange this right along with the
share of stock for cash or senior securities that are
equal in value to a specific “back-end” price stipulated
by the issuer's board of directors.
The back-end plans are used to try to limit the
effectiveness of two tiered offer. In fact, the name back-
end refers to the back end of a two-tiered offer.
20. Voting Plans
This poison pill strategy is designed to dilute
the controlling power of the acquirer. Under this plan,
the target company issues a dividend of securities,
conferring special voting privileges to its stockholders.
For example, the target company might issue shares
that do not have special voting privileges at the
outset. When a potential hostile bid occurs, the
stockholders, other than the acquiring party, receive
super voting privileges. Alternately, the target
company's stockholders might receive securities with
voting rights that increase in value over period.
21. Cont..
Voting plans were first developed in
1985. They are designed to prevent any out
side entity from obtaining power of the company
. Under this plan the company issues a dividend
of preferred stock. If any outside entity acquires
a substantial percentage of the company’s
stock, holders of preferred stock become
entitled to super voting rights.
22. Shadow pill
A bidder cannot simply look at a target company
and conclude from the fact such a defense.
Targets may simply adopt a pill after a bid has
taken place
A company may also have a poison pill which is
not openly advertised
23. Chewable pill
These are pills that disappear, or are brought to
shareholders vote, if a company receives a
certain type of offer such as a certain price or
type of consideration
E.g. If Company A wants to take over Company
B it may have to pay minimum price set by the
Board of Company B else poison pill will be
triggered
24. Bank Mail Pills
Bank mail defense wherein the
bank of a target firm refuses financing
options to firms with takeover bids
thereby having the triple impact of
imposing financial restrictions upon the
acquirer, increasing transaction costs in
locating another financing option and
also buying time for the target company
to put more defenses in place.
26. Golden Parachutes
• Special lucrative compensation agreements that the
company provide to Top management
• it may be used both as a preventive measure and as
an active measure
• It is triggered by some predetermined ownership of
stock by an outside entity
• Silver Parachutes if it is given to most of the firms
employees
• E.g. Yahoo
27. Dawn raid
• A ‘dawn raid’, i.e., a sudden entry into the stock
market by the predator at a price above the previous
market level, with a view to acquiring a major stake in
a short space of time, in that it may lead to a further
takeover offer a few days later
28. Active Antitakeover Defenses
• Greenmail
• White Knight
• White squire
• Pac-man Defense
• Crown Jewel Defense
• Litigation
• People Mail
• Jonestown Defense
• Standstill agreements
• Capital Structure Changes
29. Greenmail
• It refers to the payment of a substantial premium for a
significant shareholder’s stock in return for the
stockholder’s agreement that he or she will not initiate a
bid for control of the company
E.g..
• First reported instance of greenmail occurred in July 1979
• Carl Icahn bought 9.9% of Saxon Industries stock for 7.21$
per share
• Saxon was forced to Repurchase its own share at 10.5 $
per share on February 13, 1980
• New Career avenue was born “Corporate Raider”
Green mail has mostly decreased due to Capital gain tax
imposed on the gains derived from such stakes.
31. White Knights
• It is the company that is more favorable compared to
the Hostile company (Dark Knight)
• Eg. for White Knight
• In 1998 Allied Signal Corp. launched a Proxy Fight 10
Billion $ Takeover bid for AMP. Inc. whose value was
just under 6.5 Billion $.[
• AMP Inc. found a “White Knight” in Tyco in more
Favorable terms of stock for stock swap of 11.3 Billion
32. • Grey Knight is an acquiring company that enters a bid
for a hostile takeover in addition to the target firm and
first bidder, perceived as more favorable than the
black knight (unfriendly bidder), but less favorable
than the white knight (friendly bidder).
• Yellow Knight: A company that was once making a
takeover attempt but ends up discussing a merger
with the target company.
• Lady Macbeth Strategy
A corporate-takeover strategy with which a third party
poses as a white knight to gain trust, but then turns
around and joins with unfriendly bidders.
33. Tale of 3 Knights
• High-profile international takeover drama
surrounding Yahoo! — software giant Microsoft at
first tried to sell itself as a friendly bidder.
However, Yahoo found the offer a gross
undervaluation of their company, which sent the
ball back into Microsoft’s court.
• Search engine behemoth Google and AOL
appeared as white knights to help Yahoo brush off
Microsoft, if it were to become a black knight as it
has reportedly threatened to go ahead with a
hostile takeover.
• Rupert Murdoch led News Corp was also keen in
Yahoo! which makes it the Grey knight.
• The situation could get real interesting if black
34. White Squire Defense
• A White Squire is a firm that consents to purchase a
large block of the target company’s stock
• The White Squire is typically not interested in
acquiring management control of the target but either
as an investment or representation in board of the
target company
Advantage to Target Company
Large amount of Stock will be placed in hands of an
investor which may not be tendered to hostile bidder
E.g.. Technically Reliance is White Squire to Oberoi
Hotels against EIH
35. Pac-Man Defense
“Best Defense is a Good Offence”
It occurs when the Target makes an offer to buy
the Hostile company in response to Hostile bid for
the Target
Eg.
Martin Marietta Corporation made an offer to buy
Bendix following Bendix’s unwanted $43 tender
offer for Martin Marietta in 1962
36. Crown Jewel Defense
• It is a strategy in which the target company sells
off its most attractive assets to a friendly third
party or spin off the valuable assets in a
separate entity
• unfriendly bidder is less attracted to the
company assets
37. Standstill Agreement
“ A contract that stalls or stops the process of a hostile
takeover. The target firm either offers to repurchase the shares
held by the hostile bidder, usually at a large premium, or asks
the bidder to limit its holdings. This act will stop the current
attack and give the company time to take preventative
measures against future takeovers.”
38. Capital Structure Changes
A target corporation may initiate various changes
in its capital structure in an attempt to ward off a
hostile bidder. These defensive capital structure
changes are used in four main ways:
• Recapitalize.
• Assume more debt:
a. Bonds
b. Bank loan
39. • Issue more shares:
a. General Issue
b. White Squire
c. Employee stock action plan
• Buy back Shares:
a. Self tender
b. Open market tender
c. Targeted shares repurchase
40. People Mail
• It is kind of Black Mail where the top Management
threatens to resign En-mass in case the Hostile
takeover takes over the company
41. Jonestown Defense
• Jonestown defense is an extreme corporation
defense against hostile takeovers. In this
strategy, the target firm engages in tactics that
might threaten the firm’s existence to thwart an
imposing acquirer’s bids. This is also known as
a “suicide pill”, and is an extreme version of the
poison pill.